Whether you’re about to buy your first house or your fifth house, you’re probably familiar with mortgage loan interest rates—and how they can affect your house payment. And you know the lower the interest rate, the better! But how can you get the low home loan rate you’re looking for? Is there anything you can do to get a low rate, or is it all out of your control? Here’s what you need to know about what factors affect your home loan rate as you start looking for your dream home.
One of the main factors that determine the interest rate you’ll get on a home loan is your credit score. In particular, mortgage lenders will look at your FICO score, which takes the following details into consideration:
- Your payment history
- Length of your credit history
- How much credit you’re using
- How many new accounts you have
- What your mix of accounts looks like
The higher you score on each of these details, the higher your FICO score will be—which tells lenders you’d be a good risk because you’re likelier than most people to pay back your home loan. And in general, as long as you pay your bills on time, have had a good mix of credit accounts for years, and are only utilizing about 30% of your available credit, your score should be high enough to allow you access to low home loan rates!
So, what exactly is a high credit score? Generally, you’ll get the best home loan rate possible when your score is 760 to 850, as that’s excellent credit. But you’ll still see pretty low rates if your score is 700 to 759. If your score is in the 600s, you should be able to get a mortgage in most cases, but your home loan rate will be average. And if your credit score is in the 500s, you’ll likely have the highest rate on the market—if you’re able to qualify for a mortgage at all.
Clearly, your credit score is a big factor in the home loan rate you’ll get. So make sure you check your credit before you even start looking at houses, as you’ll want to make sure you can qualify for a loan with a decent interest rate. You’ll need at least a few months to improve your score—and fix any errors—if it’s low, which is why you should check on this major factor the minute you decide to start house hunting!
If you have a high credit score, you’re on the way to getting a low home loan rate. Your next step is making sure you’ll have enough cash for a down payment. After all, the amount you pay upfront can affect the home loan rate you get.
Why is this factor so important to lenders? Well, the more you pay upfront, the less you have to borrow—which means there’s a little less risk for the lender. So if you can afford a 20% down payment, you’ll set yourself up for a great home loan rate.
Another factor in the home loan rate you get is the type of home loan you apply for. Different types of mortgages have different average interest rates. In general, if your credit score is excellent, a conventional loan will offer you the lowest interest rate.
However, if you qualify for a VA loan, your interest rate will typically be even lower than the rate you’d get with a conventional loan. The same goes for USDA loans, which can often offer slightly lower interest rates than conventional loans.
On the other hand, FHA loans are often the better choice for home buyers with low or average credit scores. After all, if you try to get a conventional loan with a score in the 500s or 600s, your interest rate will be high. But if you get an FHA loan, your home loan rate should be much more competitive. Talking to a few lenders—including LemonBrew Lending—should help you get a sense of which interest rate you’d get with each type of home loan.
As you shop for a home loan, you’ll need to think about whether you want a fixed or adjustable rate. A fixed rate does not change over time, so you’d have the same rate throughout the life of the loan.
A loan with an adjustable rate starts out with a fixed interest rate for a specific period of time, such as five years. But after that, it goes up or down periodically based on the housing market. That means your payments could increase or decrease over the life of the loan, sometimes even doubling!
So while adjustable rate mortgages are often appealing at first due to the low interest rates they start out with, fixed rate mortgages tend to be better for buyers who want the certainty of knowing their house payment won’t drastically change over the years.
Another factor that determines your home loan rate is how long the loan term will be. This refers to how long you have to pay off the loan, which is typically either 30 or 15 years.
When you choose a loan term of 30 years, your monthly payments will be lower than they would be with a 15-year term, but your interest rate will be a little higher. This means you’ll pay more in the long term.
This is why some buyers opt for a 15-year term, assuming they can afford the higher mortgage payments every month. This type of loan term comes with lower interest rates, and since you take less time to pay off the loan, you’ll pay a lot less in interest over time.
The amount you want to finance also plays a part in your home loan rate. This is often referred to as the loan-to-value ratio, which is when you borrow an amount that is similar to the appraised value of the home. So if that value is $200,000, and your down payment will be $10,000, you’ll have to borrow $190,000.
This is seen as a risk by the lender, as it’s uncertain if the lender could recoup all that money if you were to foreclose on your home. As a result, the lender will often give you a higher interest rate.
However, if you borrow less money—typically by paying more upfront with a larger down payment—the lender may see you as a lower risk. This could mean borrowing $170,000 for a $200,000 house after you make a $30,000 down payment. This could result in a lower interest rate since the lender sees you as a lower risk.
Like anything else in life, sometimes your home loan rate just comes down to timing. More specifically, your rate could depend on how the economy is doing when you buy a house. This is because current mortgage rates change depending on inflation, unemployment rate, and the housing market.
For instance, when the economy is good and the unemployment rate is low, interest rates may be higher because more people are borrowing money to buy a house. By contrast, a weaker economy and higher unemployment usually means fewer people buying houses, which can reduce mortgage interest rates. So if the economy and the housing market aren’t doing great—but your bank account is—it may be a good time to buy if you want a low interest rate.
If you’re ready to start comparing interest rates before you look at houses, let LemonBrew help! LemonBrew Lending can help you find a home loan rate that works well for you. And as you get further in the home buying process and need title and escrow services, LemonBrew Abstract will be here to help with title insurance, closing day help, and more. Contact us today to learn more about what we can do for you as you buy a home!